Q&A-How Freeport’s row over its Indonesian mining contract has escalated
U.S. mining giant Freeport-McMoRan Inc warned this week that it could take the Indonesian government to arbitration and seek damages over a contractual dispute that has halted operations at the world’s second-biggest copper mine.
Marking a sharp escalation in the row, the government also said it would go to arbitration if no resolution was reached.
Here are some questions and answers on the contract dispute: WHAT IS AT STAKE FOR FREEPORT AND INDONESIA? Freeport’s 2016 copper sales from Indonesia were worth about $2.4 billion, up 130 percent since 1996. This year, its Grasberg mine is due to contribute around a third of Freeport’s global copper sales of 4.1 billion pounds.
But despite being one of the largest tax payers in Indonesia, Freeport’s relations with the government have become strained, particularly as Southeast Asia’s biggest economy has sought greater control over its natural resources.
Freeport and the government have been in talks on converting its 1991 mining contract to a new permit and have made some progress in recent years. Freeport has agreed to pay export taxes, higher royalties on copper, gold and silver sales, and to triple its smelter capacity and cut its concession size by more than half.
In January, however, Indonesia introduced rules that prevent Freeport from exporting copper concentrate until it adopts a new permit that would terminate its current contract and impose new terms, including some different than those already agreed.
Freeport’s current contract is not due to expire until 2021 and it wants guarantees that its mining rights will not change before committing to $15 billion of investment to expand its Grasberg underground mining operations.
WHAT IS AT THE HEART OF THE LATEST ROW? The halt in January to Indonesia’s exports of semi-processed ore exports came as part of a renewed push for miners to build domestic smelters and squeeze more from its mineral resources.
Miners like Freeport were given an option: exports could only continue once they replaced contracts of work with special mining permits.
A new permit would allow Freeport to apply for an early extension to its mining rights, but would also leave it open to prevailing rules and changes to taxes and other terms from which it is currently exempt.
The rules require Freeport to divest up to 51 percent of its Indonesian unit compared with 30 percent currently. So far it has divested 9.36 percent.
Freeport would also have to pay a dividend tax, 10 percent VAT and an export duty of up to 7.5 percent on copper concentrate exports.
WHAT ARE BOTH SIDES SAYING? Freeport says the stoppage of its exports and attempts to enforce the new rules on taxes and divestment violate its contract of work.
According to Freeport, the new mining permit lacks the legal and fiscal certainty it needs, and that under Indonesian and international law its contract should be immune to changes.
The company said it is only willing to adopt the new permit once it has a stable agreement providing the same rights and the same legal and fiscal certainty it has now.
The government has said Freeport must comply with Indonesia’s 2009 mining law, recent regulations and its 1945 Constitution, which in some cases have different requirements than terms set out in Freeport’s 1991 contract of work.
Freeport’s contract, for example, requires the company to only construct one smelter, while the government now says it must build at least one more.
The government has said it will seek a resolution that does not break the law and that honours Freeport’s contract.
HOW HAS THE ROW ESCALATED? On Feb. 17 the government issued a new export permit for Freeport allowing it to export up to 1.1 million tonnes of copper concentrate over the next year, while proposing a six-month window to negotiate fiscal terms.
Freeport has said it “cannot accept” the new permit that would require the termination of its existing contract at the end of this window, regardless of where negotiations were at.
After declaring force majeure on exports, Freeport said on Monday it had started laying off workers in Indonesia and that it had given a formal notice to the government of multiple breaches of its contract in a step towards arbitration.
WHAT HAPPENS NEXT? Freeport’s contract allows 120 days to “use its best endeavours to resolve the dispute through consultation and use of administrative remedies.”
If this fails, conciliation or arbitration proceedings would be held in Jakarta, or another location if agreed by both sides.
If Freeport opts to terminate its contract, all contract properties would be offered for sale to the government at cost or market value, whichever is lower, but not below the depreciated book value.
If the government does not accept this offer, Freeport would have 12 months to sell or dispose of assets. All roads, schools and other immovable properties that are in public use would immediately become Indonesian property.